Japan may provide IMF $106 bln aid

By Yoko Nishikawa

TOKYO (Reuters) - Japan is ready to offer $106 billion (71 billion poundsto the International Monetary Fund if it needs extra funds to help emerging economies, a Japanese government source said on Thursday, as a central bank board member warned the financial crisis has a long way to run.

Deflation rather than inflation is becoming an increasing concern across the globe, with Japanese wholesale inflation slowing sharply in October and analysts warning of weakening demand for goods as the crisis pushes developed economies towards recession.

Financial markets have remained jittery despite efforts by governments and central banks worldwide to ease the pain from the crisis. Tokyo's Nikkei stock average sank 5 percent on Thursday as a wave of grim earnings forecasts from the United States boosted worries about the global economy.

Prime Minister Taro Aso will propose offering IMF the fund when leaders of the Group of 20 industrialised and emerging nations meet for a crisis summit in Washington on Friday, the government source told Reuters.

Under Aso's draft proposal, Japan will lend part of its currency reserves totalling $980 billion, to the IMF for emerging market loans, the Nikkei business daily reported in its Thursday edition.

Although the amount is still undecided, the maximum is expected to be about 10 percent of Japan's foreign exchange reserves, the paper said.

Selling U.S. government bonds held by Japan in order to provide the funds in cash would affect U.S. bond yields. Tokyo may therefore consider lending U.S. government bonds to the IMF, which the institution can then use as collateral to raise funds, the newspaper added.

Bank of Japan policy board member Seiji Nakamura warned of difficult times ahead, saying Japan may be on the brink of a drawn-out adjustment phase as the global financial crisis could slow down the world economy.